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on International Finance |
| By: | Rohan Kekre; Moritz Lenel |
| Abstract: | We study a business cycle model of the international monetary system featuring a time-varying demand for safe dollar bonds, greater risk-bearing capacity in the U.S. than the rest of the world, and nominal rigidities. A flight to safety generates a dollar appreciation and decline in global output. Dollar bonds thus command a negative risk premium and the U.S. holds a levered portfolio of capital financed in dollars. We quantify the effects of safety shocks and heterogeneity in risk-bearing capacity for global macroeconomic volatility; U.S. external adjustment; and the international transmission of monetary and fiscal policies, including dollar swap lines. |
| JEL: | E44 F44 G15 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29238&r= |
| By: | Galina Hale; Luciana Juvenal |
| Abstract: | At the onset of the COVID-19 economic crisis, as in other crisis episodes, the flight to safety was accompanied by a rapid appreciation of “safe haven” currencies. We quantify currency-induced balance sheet effects for total external positions as well as for individual asset classes using new data on the currency composition of cross-border stocks for 48 countries for the first quarter as well as for the full year 2020. We also conduct the stock-flow reconciliation of net international investment positions to measure overall valuation effects. We show that for many countries currency-induced valuation gains mitigated losses that resulted from declining asset prices in the first quarter of 2020. Moreover, for countries with excess capital out flows during this period, the impact on external balance sheet positions was mitigated by valuation gains. This is because, in contrast with past financial crises, many emerging markets did not experience negative external balance sheet effects from their currency depreciation, partly due to currency-induced valuation gains on equity positions offsetting losses on debt positions, partly due to reduced currency mismatch on their external debt positions. |
| JEL: | F32 F34 G15 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29277&r= |
| By: | Aeimit Lakdawala (Wake Forest University); Rajeswari Sengupta (Indira Gandhi Institute of Development Research) |
| Abstract: | We create new measures of monetary policy shocks for India using high-frequency derivatives data and study their transmission. These shocks capture two distinct dimensions of the Reserve Bank of India's (RBI) monetary policy announcements. In addition to reacting to surprise changes (or non-changes) in the RBI's policy rate, financial markets also infer substantial information about the future path of the policy rate from RBI's communication. We analyze official statements and the corresponding media narrative on prominent RBI announcement dates to help understand how markets use RBI communication to update their expectations. Overall, bond and stock markets react strongly to these monetary shocks, but exhibit notable heterogeneity across governor regimes. Finally, we use the monetary shocks as external instruments to identify the impact on macroeconomic variables in a structural vector autoregression. We find some evidence of the conventional transmission of monetary policy to prices but not to output. |
| Keywords: | monetary policy, Reserve Bank of India, event study, monetary transmission |
| JEL: | E44 E52 E58 G10 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2021-021&r= |
| By: | Lloyd, Simon (Bank of England); Manuel, Ed (Bank of England); Panchev, Konstantin (University of Oxford) |
| Abstract: | We study how foreign financial developments influence the conditional distribution of domestic GDP growth. Within a quantile regression setup, we propose a method to parsimoniously account for foreign vulnerabilities using bilateral-exposure weights when assessing downside macroeconomic risks. Using a panel data set of advanced economies, we show that tighter foreign financial conditions and faster foreign credit-to-GDP growth are associated with a more severe left tail of domestic GDP growth, even when controlling for domestic indicators. The inclusion of foreign indicators significantly improves estimates of ‘GDP-at-Risk’, a summary measure of downside risks. In turn, this yields time-varying estimates of higher GDP growth moments that are interpretable and provide advanced warnings of crisis episodes. Decomposing historical estimates of GDP-at-Risk into domestic and foreign sources, we show that foreign shocks are a key driver of domestic macroeconomic tail risks. |
| Keywords: | Financial stability; GDP-at-Risk; international spillovers; local projections; quantile regression; tail risk |
| JEL: | E44 E58 F30 F41 F44 G01 |
| Date: | 2021–09–17 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0940&r= |
| By: | Cappiello, Lorenzo; Holm-Hadulla, Fédéric; Maddaloni, Angela; Mayordomo, Sergio; Unger, Robert; Arts, Laura; Meme, Nicolas; Asimakopoulos, Ioannis; Migiakis, Petros; Behrens, Caterina; Moura, Alban; Corradin, Stefano; Nicoletti, Giulio; Ferrando, Annalisa; Niemelä, Juha; Giuzio, Margherita; Petersen, Annelie; Golden, Brian; Pierrard, Olivier; Guazzarotti, Giovanni; Ratnovski, Lev; Gulan, Adam; Schober-Rhomberg, Alexandra; Hertkorn, Andreas; Sigmund, Michael; Kaufmann, Christoph; Soares, Carla; Avakian, Lucía Kazarian; Stupariu, Patricia; Koskinen, Kimmo; Taboga, Marco; Sédillot, Franck; Tavares, Luis Miguel; Matilainen, Jani; Boom, Emme Van den; Mazelis, Falk; Zaghini, Andrea; McCarthy, Barra |
| Abstract: | The financing structure of the euro area economy has evolved since the global financial crisis with non-bank financial intermediation taking a more prominent role. This shift affects the transmission of monetary policy. Compared with banks, non-bank financial intermediaries are more responsive to monetary policy measures that influence longer-term interest rates, such as asset purchases. The increasing role of debt securities in the financing structure of firms also leads to a stronger transmission of long-rate shocks. At the same time, short-term policy rates remain an effective tool to steer economic outcomes in the euro area, which is still highly reliant on bank loans. Amid a low interest rate environment, the growth of market-based finance has been accompanied by increased credit, liquidity and duration risk in the non-bank sector. Interconnections in the financial system can amplify contagion and impair the smooth transmission of monetary policy in periods of market distress. The growing importance of non-bank financial intermediaries has implications for the functioning of financial market segments relevant for monetary policy transmission, in particular the money markets and the bond markets. JEL Classification: E4, E5, G2, G38 |
| Keywords: | Asset purchases, Financial markets stress, Low interest rates, Monetary policy transmission, Non-bank intermediation, Risk-taking |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021270&r= |
| By: | Utku Bora Geyikci; Suheyla Ozyildirim |
| Abstract: | In this paper, we examine deviations from covered interest parity (CIP) for six emerging market economies using daily data following the global financial crisis. After documenting large and persistent discrepancies between January 2010 and July 2018, we show the significant role of local factors in explaining sustained deviations from CIP. Specifically, we present evidence that the main drivers of explaining CIP deviations are cost of illiquidity and interest differentials. Our findings suggest that the impact of credit risk on CIP deviations in emerging market economies may take two forms. In low-carry currencies, the well-known mechanism for credit risk operates so that the increase in credit risk exacerbates CIP deviations. Conversely, in high-carry currencies, the high usage of FX swaps makes swap rates react more than domestic rates, which causes CIP to decrease. Finally, global factors play no prominent role in predicting CIP deviations. |
| Keywords: | Covered interest parity, FX swap, Emerging markets, Financial crisis |
| JEL: | G15 F31 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:2126&r= |